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A decade ago, it would have been unthinkable for an author to self-publish their own work and distribute it to half a dozen of the leading bookstores.

Today, tens of thousands of people are doing it. How things have changed.

One of the people responsible for this revolution in publishing is Mark Coker, the founder and CEO of Smashwords, a Los Gatos, Calif.-based e-bookseller and distributor for agents, publishers and indie authors (those who self-publish). As of this week, Smashwords is distributing 121,000 e-books by 42,000 authors, agents and small publishers to the Nook, Kobo, Apple, Sony, Diesel and Smashwords e-bookstores as well as through Baker & Taylor, which operates the Blio e-reading app. That’s about as many books as a typical Barnes & Noble location can hold at one time.

Coker’s journey to the world of e-books reads like many others: He and his wife were working on a novel set within the soap opera world. Despite interest from the traditional publishing world, including representation by top agents, Coker was unable to get his book published. Test readers loved the book, but the book wouldn’t sell because, as some rejecting publishers put it, soap opera fans weren’t book readers.

And so, four years ago, Smashwords was born. The company has been profitable for the past two years and has 13 employees, a number that will grow in 2012.

Coker, 46, has long been an entrepreneur and start-up investor. In 1993, he founded Dovetail Public Relations, a communications firm based in Silicon Valley that specializes in representing start-ups; the company still operates today and Coker is still the owner although he doesn’t run the day-to-day operations. In 1999, Coker launched BestCalls.com, which gave retail investors access to company earnings conference calls; it was acquired by Shareholder.com in 2002. He is on the advisory board of GetQuik, a restaurant technology vendor, and is an investor in and former advisor to Flat World Knowledge, an open-source textbook company.

A graduate of the University of California at Berkeley’s Haas School of Business where he achieved his bachelor’s of science degree in marketing, Coker has also spent some time at IBM as an assembly line worker.

We spoke with Coker about whether agency pricing is good for the book industry as a whole, the biggest challenge facing indie authors today and the two dangerous questions authors are asking publishers.

Jeremy Greenfield: Smashwords is now working with over 100,000 titles from about 40,000 authors and publishers. Yet you only have 13 employees right now. How is Smashwords going to expand?

Mark Coker: The level of [e-book] uploads has increased dramatically over the last year. In April, we had our first month of over 9,000 new titles added to Smashwords. We’ve been increasing every month. By the end of the year, we’ll be doing more than 10,000 new titles every single month, and that’s a super-conservative estimate. We now have four years experience doing this and our growth is organic, driven by word of mouth. We don’t do any marketing.

We’re expanding our vetting team. Our vetting team opens up and manually looks at every single book uploaded to Smashwords to check that the book meets formatting requirements of retailers, to make sure that it’s legal content and to make sure it’s original content. They’re looking to enforce all the requirements of the Smashwords style guide. We’re at three or four people currently.

We’ll continue to add to our vetting team, to our support team and to our technical team throughout the year.

JG: You said that you’ve been profitable for two years now. Can you give an indication of just how profitable?

MC: Growth has been fantastic. We’re selling millions of dollars worth of books every year. Our profitability is healthy and growing. We monitor our profitability very carefully because we’re completely self-funded.

We’re a private company, so we don’t disclose specific profitability or revenue numbers.

We are a corporation and I’m the majority shareholder. The other equity holders are employees. We’re preparing to do a stock option plan for all of our employees.

JG: You’re someone who has been around Silicon Valley for a while. You know what can happen to a company when it gets an investment – it can help fuel growth and take the company to the next level. Are you currently seeking investors?

MC: No. Currently, we don’t need it. We have the finances to fund everything that is on our road-map. Outside funding would help us achieve some of these road-map objectives quicker, but I don’t feel like it’s holding us back.

One of the great things about being self-funded is that we’re completely independent and not subject to the whims of any outside investor. We don’t have to worry about an investor peeking over our shoulder or asking us to justify what we’re doing. We can focus on doing what we need to do for the long term interests of our authors, shareholders and publishers.

I’ve been working in Silicon Valley for 20 years, and very rarely do I hear that a CEO loves their venture-capital (VC) backing. Sometimes the VC’s interests are not aligned with our own.

JG: How so?

MC: A VC might ask us to start charging authors. We’re not here to do that. We’re not here to get blood from a turnip. We’re here to earn our small margins and put more money in the pockets of authors and publishers.

There are already companies out there that are, for lack of a better word, parasites. They provide these services for a fee. We provide our services for free and that’s our way of taking a risk on authors. We take a commission on the books we sell – and it’s a small commission – 10% of the retail price.

MC: The biggest challenge is self-restraint. Publishing tools, like Smashwords make it fast, free and easy for any writer anywhere in the world to publish. But we don’t make it easy to write a great book. Many writers, intoxicated by the freedom to self-publish, will often release their book before it’s ready to be released.

The biggest challenge faced by self-published authors, it’s not marketing, it’s not discoverability, it’s adopting the best practices of the very best publishers. It’s about becoming a professional publisher.

If you look at the resources we make available to our authors, most notably the latest e-book that I published, The Secrets to Ebook Publishing Success, we’re very focused of elevating the best practices of indie authors, helping to educate them and inspire them through the example of the success of other indie authors. We want to inspire them to up their game.

JG: So, not to cannibalize your sales, but what is the secret to e-book publishing success?

MC: I identified 28 best practices for indie authors. The best thing an indie author can do is write a book that markets itself.

JG: That’s hard work. What if you don’t have a great book on your hands?

MC: If your book is out there, not selling, getting poor reviews, take an honest look at it. Why is it not selling?

Typically there are a variety of factors. Maybe the cover image is poor or it’s poorly edited or you’re not marketing it properly.

Readers have always determined what books become best-sellers. It’s all about reader word-of-mouth. Influencers like Oprah are amplifiers, but they’re still a measure of word of mouth.

One of the magical things about books is that if we read a book that we love, a book that touches our soul, that book becomes an extension of who we are, we wear that book on our sleeves. If that book touched us, we want to share that book with everyone we know and love.

What marketing will do is get you your first readers. But, ultimately, the success of your book is determined not by that initial group of readers but how they react to the book.

In order to achieve virality, that book needs to resonate with every reader. And so every book will have a different viral multiplier. For some books, that first reader becomes one more reader or two readers. For most books, that first reader either becomes the last reader, or, on average, they only manage to convince a half a reader to read the book.

If you’ve got a book where one reader becomes two readers or four readers before it dies off, then that book can be actively marketed. If you convince a few more readers, each of them will convince a few more.

JG: It all sounds so easy when you break it down like that.

MC: Take J.K. Rowling’s [Harry Potter] books. She didn’t need a publisher. If she gave her first book to 20 kids in the UK, I guarantee it still would have been a best-seller.

Very few books exhibit that kind of virality, maybe one in 10,000.

Most authors are not writing a book that has that extreme viral potential, which means that the average author needs to focus on viral catalysts, things that can help increase the virality of the book.

I imagine a book is an object and attached to the object you have dials and levers and things you can tweak and turn and twist, things that can increase the availability, discoverability, accessibility, enjoyability to readers.

JG: What’s on the dials?

Price. If you price your book too high, you’re limiting the accessibility to that book. It’s not affordable.

Your e-book cover image. That’s the first impression you make to an e-book buyer. A good cover image makes a promise to a reader: This is the book you’re looking for. If the cover image doesn’t make the right promise, it limits your virality.

The book description. If the book description doesn’t adequately sell the book, then that reduces your virality.

An author or publisher has dozens, possibly hundreds of tiny tweaks they can do around the edges that in aggregate increase the availability, accessibility, discoverability and enjoyment of that book.

This is what publishers do.

JG: As you were saying before, indie authors have to learn to act like publishers.

MC: Great publishers know how to package that book and distribute that book and market that book with the right messages to the right audience. When you break it down, it’s all the great things that publishers have always done. They do it better for some books than others.

Indie authors need to learn to think like a publisher. There’s a lot of expertise that goes into connecting books with readers.

The exciting thing is that in the indie e-book world the rate of information sharing is unprecedented. An indie author can log on to Kindle Boards or mobile read or any online forum or Facebook and they can ask questions and share information – and you see this happening every day. Authors are reporting on their experiments, what’s working, what’s not working. So you’ve got all of this information sharing that is just raising the standards of knowledge.

Most of the innovation in publishing now is occurring among these indie authors because they don’t have the luxury of multi-hundred-thousand dollar marketing budgets. So, indie authors are forced to do things that don’t require money, to think creatively, to take risks.

It’s the indie authors who pioneered low pricing for e-books. It’s indie authors who pioneered the use of “free” as a promotional tool and a platform tool.

When I look at the books coming in to Smashwords today, the e-book cover images are so much better than they were four years ago. Self published authors are becoming better publishers.

JG: Should the established publishers be worried about this? At the Digital Book World Conference in January, we learned that indie authors took an estimated $100 million from publishers last year – sounds like a lot, but it’s a very small percentage of the overall trade book business.

MC: Authors are starting to ask two very dangerous questions from the standpoint of publishers:

What can the publisher do that I can’t do for myself? They’re saying, “I can publish myself and distribute myself and hire my own editors.” The distribution of e-books is now open to all.

And, will it actually harm my ability to reach readers if I work with a large publisher? They’re saying, “That large publisher is going to price my book too high, so they’re going to price me out of the market. If my publisher insists on pricing my book $9.99 and higher, I’m going to get beat by all the other authors who are priced lower.”

In publishers’ favor, every single book is a unique product, and price isn’t the only consideration for consumers.

But these questions set up publishers to be in a precarious situation.

The secret is now out on how to become a professional publisher. That knowledge is now freely available on main street.

JG: That hasn’t stopped publishers from continuing to do what they’ve always done: publish and sell great books and make money doing it.

MC: Publishers are starting to adapt. They’re starting to experiment with prices and promotions. They’re starting to experiment with the long tail. That’s good.

In order for big publishers to survive, they need to completely change their mindset. Back when they had an oligopolistic hold on publishing, they controlled access to distribution. So, they adopted a culture of “no.” they were the sole arbiters, they were the ones who determined which writers graduated to become published authors. They were the gatekeepers at the pearly gates of publishing heaven.

That’s all changing now.

Rather than say “no” to 99.5% of everything coming in their door, they need to find a way to say “yes” to these authors. Rather than asking them “what can you do for me,” publishers need to twist that around and focus on what they can do for authors.

Great publishers already do this.

When I look at the future of publishing, we all become service providers for authors. The authors are in control. The power has shifted from publishers to authors. Anyone who doesn’t believe that and honor that is going to go out of business.

MC: If large publishers start dropping their prices aggressively and precipitously, then that would increase competition for indie authors, but I don’t see that happening.

The large publishers are trying to maintain prices of $9.99 and up for their e-books but I know there are some exceptions to that. Indie authors have already moved down to $2.99. So, in the marketplace, that creates an incredible pricing advantage for the indie author. If they can offer a book that’s equal or better quality content, the $2.99 book wins.

If publishers start dropping their books to $2.99, it means readers will have more of a choice of quality content and indie authors won’t have as much of a pricing advantage.

JG: Why won’t they just do that?

MC: I don’t see that happening because it doesn’t work with the expenses and balance sheets of bigger publishers. If they were to lower prices precipitously, they’d have to change their compensation model for authors, they would reduce their margins and reduce their profitability. Ultimately, there is a limit to how many books consumers can read and there are already too many books out there.

When you look at the economics here, the indies have an incredible advantage. Many of the best authors from the biggest publishers are fighting strong financial incentives to leave their publishers.

Publishers are paying between 12.5% and 17% of list price to authors for e-books.

Contrast that with what self-published authors are earning. They’re earning 60% of list if they’re working with a distributor like Smashwords and 70% of list if they’re working directly with the retailer.

Because the indie author is earning 60% to 70% or more of the list price, it allows them to compete on price but still earn more per unit sold than they would if they were working with a publisher.

The other economic driver that works to the disadvantage of large publishers, because they’re trying to maintain higher prices, many of their authors are selling fewer units than they would if their books were priced at $2.99 or $3.99.

[Editor’s Note: We did not discuss print titles during our interview. It should go without saying that print distribution can play a part in authors’ decisions on how to publish.]

JG: It looks like soon retailers will have that control over pricing. Do you think that the Department of Justice is making a mistake with its lawsuit against publishers?

MC: Yes. I think their lawsuit is well-intentioned but ill-conceived and ill-executed. When I look back to the situation in late 2009 and early 2010, you had six publishers drowning in a swimming pool, scared about the future, scared that Amazon controlled 90% of the e-book market, scared that the rise of e-books could post a potential threat to their print business, scared that they were losing control over the direction of the market.

On the edge of the pool you had Steve Jobs and Jeff Bezos each reaching out their hands, offering to pull the publishers out of the water. Five of the six reached for Steve Jobs because he offered them a model that satisfied their concerns on multiple levels. One of those publishers got out of the pool with Jeff Bezos. I don’t think there was any collusion in that. They wanted to see a strong white knight counterbalance to what they viewed as Amazon’s dominance in this emerging category.

According to the evidence that I read from the DoJ, it does appear that some publishers did some stupid things. They may have met and talked about things that they shouldn’t have talked about. They may have done things that give the appearance of collusion.

The unfortunate result of all of this is that you’ve got these five big publishers under scrutiny. You’ve got three who folded – they’ve basically sold their souls for the next few years and they’ve agreed to onerous restrictions that are going to slow them down and make them less efficient at the very time that these publishers need to become faster and more nimble.

The three publishers that settled are going to be at a disadvantage. And that saddens me. I don’t want any big publishers to go away. I want them to be successful. It’s not the future I want to see.

JG: What are you reading and on what platform?

MC: I don’t have time to read.

One of the last e-books I read was The Art of War on my iPhone four or five months ago. I only get to read when I’m on vacation. And most of my recent vacations have been focused on writing, not reading.

Authors need to adopt the best practices of professional publishers. I wish every writer out there could be forced to read those words and understand what they mean before even thinking about putting a book out there. Having been traditionally published, I’ve considered (am still considering) self-publishing, but I’ll never do it until I can be sure it’s professionally done, which requires an investment in professional services. It’s a business, which generally requires enlisting the help of related professionals in order to succeed. Keep touting those words, Mark. Writers need to hear them.

I like what Mark says here: “the average author needs to focus on viral catalysts, things that can help increase the vitality of the book.” Many authors are focused on publishing their work, but little attention is paid to the “what next.” The next thing is to create a publicity plan that can, in fact, be that “viral catalysts.” Planned and executed well, this could be the difference between a good book being a dud in the marketplace, and one being successful.

There are some great points here for authors to take to heart and one specific quote I would like to mention. You wrote, “We provide our services for free and that’s our way of taking a risk on authors. We take a commission on the books we sell – and it’s a small commission – 10% of the retail price.”

With this in mind, it’s important to note that authors who publish with Booktango by July 4, 2012, will receive the entire sales price of their e-books sold on bookstore.booktango.com. That means that if an e-book sells for $4.99 through the Booktango bookstore, the author gets $4.99. If the e-book sells through another outlet (such as Amazon®, Barnes and Noble®, Kobo®, Apple® iBooks, or Google®), the selling retailer takes its standard fee, and the author gets the rest. In both of these examples, Booktango takes nothing—for the life of the book. Authors who published prior to our May 2 announcement are grandfathered into the program and will earn maximum royalties for the life of their books, too.

Also, if we’re challenging authors to become professional publishers we should help them. Booktango offers services to help them increase the quality and marketability of their product. With Booktango, authors have freedom and choice—the freedom to publish free of charge and the choice to purchase services to increase the quality of their book. This, along with our DIY Cover Designer and broad distribution, makes a considerable case for why Booktango is the frontrunner in the e-book publishing marketplace.

I think it is also important to have an imprint that says that the book has gone through the publishing process. At Indie Artist Press, we offer services to authors such as editing, etc. and we will not place our imprint every book that is submitted to us. We require that the book go through an editing process, but we do not require that the author pay *us* for the service. If the book makes the cut, we help the author self publish by letting them use our imprint. Our goal is to separate the wheat from the chaff, as it were, so that booksellers and readers can see a publisher that is not a platform or the author’s name. Our imprint will also scream, \This book is self-published,\ but with the caveat that it had to be \good enough\ to \be published.\

Your system often offers troubles for submitting books though formatted according to your style guide. I was made to close my account with 14 published books because I asked for an explanation on your flaws. How far you think you deserve to be a publisher?